JPMorgan’s billion-dollar boo-boo will spur federal regulators to finally crack down on reckless risk-taking by the big banks.

The ultimate defense by those “smartest guys in the room” on Wall Street against proponents of tighter government regulation is that folks outside the industry are too uninformed to grasp the intricacies of high finance.

It’s part of a general belief in the business world that politicians are, for the most part, venal and stupid, and that government is almost always incompetent.

There’s much there we can agree with. Most of us don’t really have a handle on high finance, especially its new derivative-driven investments. And government, Congress anyway, is assuredly both stupid and incompetent.

But it’s the implicit contrast in this line of argument that’s tough to swallow: that the suits on Wall Street have their stuff together, that they know just what they’re doing. What a crock!

The truth is they’re as clueless and incompetent as the rest of us about much of high finance, especially when calculating the risk their dicey investments create for the banks, for the larger economy and for society itself.

For this, we have fresh evidence — the pratfall taken by Wall Street’s supposed best and brightest, JPMorgan Chase and Jamie Dimon, its sainted CEO. They’ve managed to create a $2 billion (maybe more, probably more) investment turkey.

If the economic media have it right (and there’s a stretch), the guys and gals in the JPMorgan boardroom still haven’t figured out exactly what caused the calamitous loss or its size. Even Dimon concedes he’s in the dark about how his firm got so deep in derivatives doo-doo.

Despite JPMorgan’s lousy gamble and the damage it’s done to investor confidence (stock purchases are down), it’s not the biggest worry on Wall Street. Instead, it’s that JPMorgan’s billion-dollar boo-boo will spur federal regulators, using the Dodd-Frank law, to finally crack down on reckless risk-taking by the big banks.

The so-called Volcker rule, part of Dodd-Frank, allows the banks “hedge”-bet trading to protect — to “hedge” — against potential losses. But it bans big, risky proprietary bets of the kind that brought the banks and the national economy to the brink in 2007 and 2008.

So which type were the trades that cost JPMorgan at least $2 billion — allowed or banned? No one seems to know. But if the bankers, led by Dimon, have their way, it won’t matter.

They’re pouring wads of cash — published amounts vary, but $7 million is a popular number — into a lobbying campaign to eviscerate Dodd-Frank. And with help from Republican allies on Capitol Hill, they just might get away with it.

Why do these “smartest guys” take such risks? The most obvious reason is that’s how you make the big bucks in salary and bonus. But another equally compelling reason exists: There really is no great risk. Hated government will always bail them out. Alas, it probably has to be that way.

Banks provide the cushion of credit for our market economy and can’t be allowed to fail, not the biggest of them, anyway. They operate in a heads-I-win, tails-the-taxpayer-loses environment.

The bankers, with unequaled chutzpah, insist they’re best able to regulate the industry. They know best, remember? They’ve got a good thing going here and they’re determined to keep it that way.

Dimon, for example, is president, chairman and chief executive of JPMorgan Chase — his own boss at every level. Worse yet, he also sits on the New York Federal Reserve Board that oversees his bank. So who’s watching the store?

There’s no shortage of suggestions on how to fix this Wall Street casino — require banks to keep more cash on hand for bad times, or even break up the biggest ones most likely to bring down the whole system.

But there’s a high hurdle — they’d cut into bank profits and thus would face opposition from virtually the whole industry.

The surest cure would be something like Glass-Steagall, the post-Depression law that separated commercial banking (deposits and loans) from investment banking (derivatives and other high-risk products).

For 70 years, Glass-Steagall ended the bank practices of the rollicking, risky 1920s — until repealed by President Bill Clinton and a GOP-run Congress. Its repeal set the stage for the Great Recession of 2007-08 and, by extension, the JPMorgan Chase debacle.
Restoring it, however, is a long shot. Truth is, the big bankers still hanker for a return to the Roaring Twenties.